On March 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Mozambique.

In recent years, Mozambique's economy has been adversely affected by the fall in commodity prices and adverse weather conditions, as well as by the issue of undisclosed loans in the spring of 2016 and the ensuing freeze in donor support. Growth decelerated in 2016 to 3.8 percent (from 6.6 percent in 2015) and the latest data show that the economy grew by 3.7 percent in 2017, driven by a recovery in agriculture and mining activity (due to a surge in coal production). A tight monetary stance, coupled with exchange rate appreciation, led to a steep fall in inflation to 6.3 percent (year on year) in January 2018, from a peak of 26 percent in November 2016. However, the 2017 fiscal deficit on a modified cash basis (i.e., including external and domestic arrears) is estimated to have increased to around 8.2 percent of GDP compared to 7.6 percent of GDP in 2016, mainly due to continued spending pressures, including from a higher wage bill and high debt service costs. [2] The external current account deficit continued to narrow in 2017. This was due to a boom in mining exports and to a contraction in megaproject imports of services. Another factor was the one-off inflow in income associated with the capital gain tax from the sale of ENI's stake in the Coral South natural gas field to Exxon Mobil. Debt remains in distress as the stock of public sector debt-to-GDP reached 128.3 percent at end-2016, with several debt payments missed, including on the Mozam Eurobond.

The outlook remains challenging. Absent further policy action, real GDP growth is expected to further decline over time while inflation would remain at current levels. The fiscal deficit would expand, leading to further accumulation of public debt and crowding out of the private sector. Banks' rising exposure to the government, combined with high interest rates, create potential macrofinancial vulnerabilities.

Executive Board Assessment [3]

Executive Directors noted that Mozambique's economy is facing difficult challenges. While inflation has declined rapidly, real GDP growth remains weak and macroeconomic imbalances are growing. Directors stressed the need for a rebalancing of the policy mix to ensure durable macroeconomic stability and for advancing structural reforms to support inclusive growth.

Directors noted that a steadfast fiscal consolidation effort aimed at closing the primary deficit is essential to ensure fiscal sustainability. They urged the need to broaden the tax base by eliminating VAT and other tax exemptions and to reduce current spending, while protecting outlays to social protection and infrastructure projects. Directors welcomed the authorities announced plans to resume discussions with private creditors and stressed that making progress in debt restructuring discussions would be an important step towards restoring debt sustainability.

Given the reduction in inflation and the high real interest rates, Directors welcomed the recent decision to reduce the monetary policy rate. Directors felt that fiscal consolidation could provide room for further cautious easing of monetary policy, thus rebalancing the policy mix. They encouraged the authorities to maintain exchange rate flexibility to help mitigate shocks.

Directors observed that implementing financial sector and monetary regime reforms is essential to strengthen resilience and mitigate risks. They welcomed the central bank's efforts to enhance its supervisory capacity, modernize the bank resolution framework, and to revise the central bank law to provide it with a clear mandate and operational autonomy.

Directors welcomed the authorities' action plan to improve governance, transparency, and accountability. They noted that while Mozambique has a sound anti?corruption legal framework in place, strengthening implementation and enforcement going forward is key to fighting corruption. Directors welcomed the approval of a decree establishing a framework for contracting public debt and issuing guarantees. They stressed that providing full clarity on the use of the proceeds of the previously undisclosed loans contracted by three public companies will be critical to restoring confidence and encouraging private investment.

Directors called for a renewed effort to strengthen the business climate and governance to boost private investment and job creation to support inclusive growth and further reduce poverty and inequality. They noted that restructuring ailing state?owned enterprises will be key to improving efficiency, and reducing financial losses.

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